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Financial Risk Management at Toyota

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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 Korean war. 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 RIS •

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



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 

 Toyota adopted FAS No 133, amended as on 1st A ril 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 fair value value had to be be recognized immediately Toyota used interest rate swaps, currency swaps and

CASH FLOW HEDGES





Was not used to protect Toyota from variability in cash flow Toyota used interest rate risk, foreign foreign exchange exchange risk  and currency swaps

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