8361414 financial risk management at toyota

8/3/2019 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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