8361414 Financial Risk Management at Toyota
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Transcript of 8361414 Financial Risk Management at Toyota
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FINANCIAL RISK MANAGEMENTAT TOYOTA
BY
M. BOBBY MEETEIPRKASH BIJOUR
AANCHAL SHAH
VARUN GUPTA
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HISTORY OF TOYOTA Sakichi Toyoda founded Toyota.
Founded Toyoda Automatic Loom
Works(TALW) in 1926.
Kiichiro opened auto department in
1933.
He faced competition from Ford andGM.
Est. Toyota Comp. Ltd in 1937 after
renaming Toyoda by Toyota in 1933.
Second World war
Suffered a lot of financial problems.
Company had to be bailed out by
consortium of banks.
Downsized and restructured on sales
and manufacturing units.
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CNTDu By 1952, Toyotas financial health
restored coz of the Korean war.
Showed interest in TQM.
Won prestigious Deming prize for
quality in 1965
Launch of Corolla and sales morethan 71,000 cars.
Joint Venture with GM and estb. New
Motor United Manufacturing
Inc.(NUMMI)
Had a major achievement in US
market when it successfully launchedthe 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.
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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 thestrongest of Global auto manufacturers.
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CREDIT RISK
What is credit risk ?
(Risk of loss as a result of a default by a obligator)
Used various financial instruments in normal course ofbusiness.
Executed only with creditworthy international FI
All foreign currency dominated in US $,Euro
Toyota didnt face significant losses due to the nature of its
counter parties
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MARKET RISK What is Market Risk?
(Market Risk can be defined as the risk of adverse deviations of the mark to
market value of the trading portfolio during the period that is required to
liquidate the transaction)
Why was Toyota exposed to market risk?
(because of the changes in currency rates, interest rates and certain commodity
and equity prices)
What did Toyota do to come out of it
(Toyota used various Derivatives financial instruments)
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CURRENCY RISK What is currency risk?
Toyota faced it as because..
Toyotas financial statement affected both by TRANSLATION and
TRANSACTION
Weakening in Japanese yen against other currency has +ve impact
on Toyotas revenue, operating income and net income
YEAR JAPANESE YEN vs. US $ Impact on Toyota2003 Av strong -ve
2002 weaker +ve
2001 Av strong -ve
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Foreign currency exposures
Western Europe
Value at Risk Analysis
Estimated using Monte Carlo Simulation Method
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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
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What is commodity price risk?
Change in price of commodity like
Aluminum
Palladium
Platinum
Rhodium
Steel
Didnt use derivative to hedge commodity price risk
COMMODITY PRICE RISK
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EQUITY PRICE RISK
Toyota invested in various available for sale
securities
The fair value of this securities in march 31 2002 was564.4 billion yen where as in march 31 2003 it went
down to 487.6 billion yen
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DERIVATIVE FINANCIAL INSTRUMENTS :
ACCOUNTING AND VALUATION
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Did not use the derivates for speculation or trading
purposes
Changes in the fair value of the derivatives wererecorded each period in current earning or other
comprehensive income
The ineffective portion of all hedges was recognizedin current earnings
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TOYOTA ADOPTED FAS NO 133, AMENDED
AS ON 1STAPRIL 2001
Derivative instruments essentially resulted in assets
and liabilities
Derivatives instrument were classified into fourcategories under FAS-133.
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FAIR VALUE HEDGES
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Gain or loss from re-measuring the hedginginstruments 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
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CASH FLOW HEDGES
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Was not used to protect Toyota from variability incash flow
Toyota used interest rate risk, foreign exchange riskand currency swaps
31st march 2002 net derivative gain yen 4,762
million
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