Financial risk management at Toyota

BY

Group 4

History of Toyota• Sakichi Toyoda founded Toyota.• Kiichiro opened auto department.• He faced competition from Ford

and GM.• Estb of company Ltd took place

in 1937.• Second World war • Suffered a lot and financial

problems.• Company had to be bailed out by

consortium of banks.• Downsized and restructured.

Cntd…• By 1952, Toyota’s financial health

restored coz of the Korean war.• Showed interest in TQM.• Launch of Corolla and more than

71,000 cars.• Joint Venture with GM.• Had a major achievement in US

market when it successfully launched the Lexus and even Celica.

• Appreciation of yen and restrictions put on imports of Japanese cars by western counties, Toyota stepped up its efforts to set up plants abroad.

• Toyota had increase in operating income and vehicle sales.

• Made plans to buy 5% stake in Yamaha.• By early 2000s, Analysts considered Toyota to be the

strongest of Global auto manufacturers.

CREDIT RISK

• What is credit risk ?

• Used various financial instruments

• Executed only with creditworthy FI

• All foreign currency dominated in US $,Euro………

• Toyota didn’t face significant losses ……

MARKET RISK

• What is Market Risk?

• Why was Toyota exposed to market risk

• What did Toyota do to come out of it

– Derivative

CURRENCY RISK• What is currency risk?

• Toyota faced it as because…..

• Toyota’s financial statement affected both by TRANSLATION and

TRANSACTION

• Weakening in Japanese yen against other currency has +ve impact

on Toyota’s revenue, operating income and net income

YEAR JAPANESE YEN vs. US $ Impact on Toyota

2003 Av strong -ve

2002 weaker +ve

2001 Av strong -ve

• Foreign currency exposures

– Western Europe

• Value at Risk Analysis

– Estimated using Monte Carlo Simulation Method

Interest rate risk

• What is interest rate risk?• Instrument used to reduce interest rate risk

– Future and contract – Interest rate caps and floors– Other investments

• Toyota faced this risk as there was some shortcoming in there present method

• What is commodity price risk?• Change in price of commodity like

– Aluminum– Palladium– Platinum– Rhodium– Steel

• Didn’t use derivative to hedge commodity price risk

Commodity price risk

EQUITY PRICE RISK

• Toyota invested in various available for sale securities• The fair value of this securities in march 31 2002 was

564.4 billion yen where as in march 31 2003 it went down to 487.6 billion yen

DERIVATIVE FINANCIAL INSTRUMENTS :ACCOUNTING AND VALUATION

• Did not use the derivates for speculation or trading purposes

• Changes in the fair value of the derivatives were recorded each period in current earning or other comprehensive income

• The ineffective portion of all hedges was recognized in current earnings

Toyota adopted FAS No 133, amended as on 1st April 2001

• Derivative instruments essentially resulted in assets and liabilities

• Derivatives instrument were classified into four categories under FAS-133.

FAIR VALUE HEDGES

• Gain or loss from re-measuring the hedging instruments at fair value had to be recognized immediately

• Toyota used interest rate swaps, currency swaps and swap agreements

• Loss of Yen 625 million for 2002 and for 2003 yen 488 million

• This was included in the cost of financing operations in the accompanying consolidated statements of income

CASH FLOW HEDGES

• Was not used to protect Toyota from variability in cash flow

• Toyota used interest rate risk, foreign exchange risk and currency swaps

• 31st march 2002 net derivative gain yen 4,762 million

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