Financial Risk Management At Toyota

Financial risk management at Toyota

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.

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Showed interest in TQM.

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Launch of Corolla and more than 71,000 cars.

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Joint Venture with GM.

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Had a major achievement in US market when it successfully launched the Lexus and even Celica.

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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

• 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

Commodity price risk • 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

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

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

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

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