Cash and tom

A currency deal has two dates. The trade date is the day both parties agree. The value date is the day the money actually moves.

In FX the standard gap is two business days. That is the spot value date.

But you can settle sooner, and the market has names for the two earlier dates.

Cash — also called ready — settles on the same day as the trade. Value today.

Tom is short for tomorrow. It settles on the business day next to the trade date. Value T+1.

Here is the point candidates miss. A cash price and a tom price are not independent prices. They are derived from the spot price. The workbook says it directly: the price at which settlement takes place before the spot date is a derived price from the spot price and is not a traded price.

So if you want dollars today rather than on Wednesday, the bank starts from the spot rate and adjusts it for the two days you have pulled forward.

The ladder (Chapter 1, section 1.3.10). Depending on the gap between trade date and value date, spot forex trading is categorised as cash, tom or spot:

The workbook states the derivation rule precisely: for a currency pair whose spot date is T+2, if settlement happens on the trade date the settlement price is called the cash rate, and if it happens one day after trade date the price is called the tom rate.

How the bank builds the price. Section 1.3.7 supplies the link. The base rate is derived from the ongoing market rate, and normally the interbank rates for spot deliveries are considered as the base rate. For quoting merchant transactions on a cash basis (value Today), the base rate will be adjusted to the extent of cash/spot differences. That adjustment is the cash-spot difference, and it is what separates a cash rate from a spot rate.

Where cash and tom show up in the Indian plumbing.

• CCIL settles cash, tom, spot and forward USD-INR interbank transactions, through a process of multilateral netting.
• FEDAI market hours for FCY/INR are 9.00 am to 5.00 pm IST, and value cash transactions may be undertaken only up to 5.00 pm IST, except for individual persons — including a joint account or a proprietary firm — who may transact even on Saturdays, Sundays and holidays as per the bank's internal policy.
• Spot date roll-over for FCY/INR transactions takes place at 12.00 midnight IST.
• FBIL uses Cash-Tom transactions up to 12 noon to calculate the Overnight US Dollar-Indian Rupee forward premia benchmark.

That last one is why the pair is worth a page. The cash-tom spread is the market price of one day of rupee funding, which is exactly what an overnight forward premium measures.

The timeline. A dealer trades USDINR on Monday, a normal week with no holidays.

Pricing a cash deal. The 83.0000 spot level is the workbook's own worked figure; the cash-spot difference below is illustrative, since the workbook gives no pip figures.

An importer must pay USD 2,00,000 today. Spot USDINR is 83.0000 and the bank's cash-spot difference is 1.5 paise.

The Rs 3,000 difference between cash and spot is two days of funding on Rs 1.66 crore. The bank did not quote three prices. It quoted one, and derived the other two.

Where the deadline bites. The same importer calls at 5.30 pm.

So the corporate importer settles tom instead, and pays the tom rate.

And the benchmark. FBIL builds its Overnight USD-INR forward premia rate from Cash-Tom transactions up to 12 noon — so trades like the ones above, done before noon, are what the published overnight premium is computed from.

Chapter 1, section 1.3.10 (Settlement date and Value date), defines cash, tom, spot and forward with the timeline diagram and the rule that pre-spot prices are derived. Section 1.3.7 gives the base-rate adjustment for cash-basis merchant quotes; section 1.3.6 gives the 5.00 pm cash cut-off and the midnight spot roll-over; section 1.3.3 gives CCIL's settlement of cash, tom, spot and forward USD-INR; section 1.3.9 uses Cash-Tom for the FBIL overnight premium. Questions test the day counts (T, T+1, T+2) and, at a higher level, that cash and tom rates are derived, not traded.

• Cash is T, tom is T+1, spot is T+2. "Ready" is another name for cash, not for spot.
• Cash and tom rates are derived from the spot price. They are not separately traded prices, and a question saying otherwise is wrong.
• Business days, not calendar days, and the spot date additionally needs both centres open.
• Forward tenors run from the spot value date, not from the trade date. A one-month forward on a Monday trade matures one month after Wednesday.
• Value cash transactions stop at 5.00 pm IST — except for individuals, joint accounts and proprietary firms, who may transact even on weekends and holidays.
• Spot date roll-over is at midnight IST, so the value dates shift at midnight, not at the 5.00 pm market close.
• FBIL uses Cash-Tom up to 12 noon for the Overnight premium — not the full day's trades, and not spot trades.