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.
• 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
• 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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