Toyota 2006 Annual Report Download - page 87

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instruments that are denominated in foreign currencies.
Toyota’s most significant foreign currency exposures relate to
the U.S. dollar and the euro.
Toyota uses a value-at-risk analysis (“VAR”) to evaluate its
exposure to changes in foreign currency exchange rates. The
value-at-risk of the combined foreign exchange position repre-
sents a potential loss in pre-tax earnings that was estimated to
be ¥57.1 billion as of March 31, 2005 and ¥51.9 billion as of
March 31, 2006. Based on Toyota’s overall currency exposure
(including derivative positions), the risk during the year ended
March 31, 2006 to pre-tax cash flow from currency movements
was on average ¥46.6 billion, with a high of ¥51.9 billion and a
low of ¥44.1 billion.
The VAR was estimated by using a Monte Carlo Simulation
method and assumed 95% confidence level on the realization
date and a 10-day holding period.
Interest Rate Risk
Toyota is subject to market risk from exposures to changes in
interest rates based on its financing, investing and cash man-
agement activities. Toyota enters into various financial instru-
ment transactions to maintain the desired level of exposure to
the risk of interest rate fluctuations and to minimize interest
expense. Certain exchange traded future and option contracts,
interest rate caps and floors, along with various investments,
have been entered into to reduce the interest rate risk related to
these activities. The potential decrease in fair value resulting
from a hypothetical 100 basis point upward shift in interest
rates would be approximately ¥56.3 billion as of March 31,
2005 and ¥75.6 billion as of March 31, 2006.
There are certain shortcomings inherent to the sensitivity
analyses presented. The model assumes interest rate changes
are instantaneous parallel shifts in the yield curve; however, in
reality, changes are rarely instantaneous. Although certain
assets and liabilities may have similar maturities or periods to
repricing, they may not react correspondingly to changes in
market interest rates. Also, the interest rates on certain types of
assets and liabilities may fluctuate with changes in market inter-
est rates, while interest rates on other types of assets may lag
behind changes in market rates. Finance receivables are less sus-
ceptible to prepayments when interest rates change and, as a
result, Toyota’s model does not address prepayment risk for
automotive related finance receivables. However, in the event of
a change in interest rates, actual loan prepayments may deviate
significantly from the assumptions used in the model.
Commodity Price Risk
Commodity price risk is the possibility of higher or lower costs
due to changes in the prices of commodities, such as non-fer-
rous alloys (e.g., aluminum), precious metals (e.g., palladium,
platinum and rhodium) and ferrous alloys, which Toyota uses in
the production of motor vehicles. Toyota does not use deriva-
tive instruments to hedge the price risk associated with the pur-
chase of those commodities and controls its commodity price
risk by holding minimum stock levels.
Equity Price Risk
Toyota holds investments in various available-for-sale equity
securities that are subject to price risk. The fair value of avail-
able-for-sale equity securities was ¥904.8 billion as of March
31, 2005 and ¥1,469.1 billion as of March 31, 2006. The
potential change in the fair value of these investments, assum-
ing a 10% change in prices, would be approximately ¥90.4 bil-
lion as of March 31, 2005 and ¥146.9 billion as of March
31, 2006.