DEFINITION of Tom-next or tomorrow next trade
Tom-next or tomorrow next trade represent the one-day swap.
WHAT IT IS IN ESSENCE
In Forex it is used to postpone or roll a maturing foreign exchange deal out to a future value date. This is one-day swap and it is quoted between tomorrow and the next day (it is carried out between tomorrow and the spot rate).
A trader can maintain a long position in the underlying currency transaction for one more day. And without having to make physical delivery of the underlying amount of currency.
Theoretically, the trader could continue to roll the value date using tom/next transactions. And keep the position on for an unspecified period of time.
In other words, instead of accepting delivery of the currency they have traded, the position is extended. And the provider swaps any overnight positions for an equivalent contract that starts the next day.
When calculated, the difference between these two contracts is the tom-next adjustment rate.
HOW TO USE
Example: trader buys 20 million euros against dollars spot at 1.2000. Spot transactions are typically due in two business days.
But the trader decides to extend the value date by using a tom/next.
In the tom leg of the transaction, the trader sells 20 million euros for dollars for value tomorrow. That matches to the original deal’s value date.
The second leg of the tom/next is a spot transaction to buy 20 million euros against dollars for the next value date. So, this allows the trader to keep his long position in 20 million euro/dollar for one additional day without making physical delivery.
Or you are in this situation, for example.
Let’s say that from the last trading day, and it is Friday. And you didn’t close our your GBP/USD position, and you’re in precisely this situation. You’re long 100k GBP/USD.
You can’t trade out of that today, because 100k traded today has a value date of Wednesday, whereas the 100k traded on Friday has a value date of Tuesday.
What you need to do is sell a 100k GBP/USD forward (value date Tuesday), and buy 100k GBP/USD spot, to roll your position to today. Executing this swap trade is known as a tom/next roll.
The price on the two legs will be slightly different due to interest rate differences between dollar and sterling.
This forward transaction is known for short as tom next or simply as T/N.