how tomorrow next tom next works
the currency or foreign exchange market is the largest and most liquid market in the world with 7 5 trillion in over the counter daily trades in april 2022 1 the market is open 24 hours a day five days a week it is a complex market that requires a great deal of expertise and knowledge to avoid risk and taking large losses the goal of trading in this market is to buy currencies at low prices and sell them when the value rises to generate a profit in most markets trades end with the investor taking delivery of the financial asset in question forex trades result in physical or electronic delivery of the currency the delivery date for currencies is typically two days or t 2 after a trade order is placed this is referred to as the spot date a trader can extend the trade past this date which is referred to as tomorrow next by rolling over their position to tom next traders can keep their positions open overnight and avoid taking delivery of the currency this allows them to execute a simultaneous trade they can complete an fx swap which means they can buy and sell a currency over two business days in this case the first day is tomorrow and the second is the day after that traders who don t roll over their position are forced to take physical delivery of that currency because this is rarely the case a tom next transaction is essentially the extension of a trader s position if the two currencies have identical interest rates then they will be swapped at the same rate special considerationsdepending on what currency the trader holds they will either be charged or earn a premium traders and investors who hold high yielding currencies will roll it over at a more favorable rate minimal because of the interest rate differential this differential is known as the cost of carry the transactions of tom next trades are executed by dealers in the interbank market depending on the direction of their transaction the trader will either buy and sell or sell and buy the currency they roll over a tom next transaction is generally handled by the forwards trading desk or the short term interest rate stir team tomorrow next transactions are also used in the commodities derivatives market although this terminology is not often used there the principle of rolling over a position is perhaps even more important in commodities trading because if it is not done a trader is required to take delivery of the underlying commodity at expiration example of tomorrow next tom next here s a hypothetical example to show how the idea of tomorrow next works let s say that a trader is long on the eur usd pair which trades at 1 53 1 euro buys 1 53 u s dollars on its expiration date the trader issues a tom next instruction to continue holding onto the pair suppose the swap interest rates for the pair are in the range of 0 010 to 0 015 at the end of the trading day after the purchase and sale of shares the trader is offered an interest rate of 0 010 the new price of the trader s position becomes 1 52 the following day 