Tom-next definition

That tom-next adjustment will be used to calculate the overnight funding charge on a forex position, which you will have to pay if you want to keep your forex trade open for longer than a single day.

Tom-next is calculated by adjusting the closing level of your open position with the interest rate of the currencies involved – rates can change daily as they are based on the underlying market price.

If you are buying a currency with a higher interest rate, then you would receive an interest payment, but if you are buying a currency with a lower interest rate, you would have to pay interest. This payment is also known as cost of carry.

Example of tom-next

Let’s say that you decide to trade the EUR/USD pair – you open a position to buy €100,000 and sell USD at a price of 1.1366. In order to keep your position open beyond the expected delivery date, you would need to sell your €100,000 the following day (tomorrow’s date), and then buy it back at the new spot price.

The current price of your EUR/USD position is 1.1378/1.1379: that is, 1.1378 to sell and 1.1379 to buy. However, the new spot rate is one point higher at 1.13795/1.13805. To roll your position, you would be selling at 1.1378 and then buying back at 1.13805 – effectively paying 2.5 points.

In this example we would say that the tom-next rate is 0.5/2.5. And as a €100,000 EUR/USD trade is equivalent to $10/pt, rolling this position would cost 2.5 x $10 = $25 (plus a small admin fee).