Toyota 2008 Annual Report Download - page 93

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•Annual Report 2008 • TOYOTA
Performance Messages from the Management &
•Overview •Management •Special Feature •Business Overview •Corporate Information •Financial Section •Investor Information •
Toyota uses a value-at-risk analysis (“VAR”) to evaluate its
exposure to changes in foreign currency exchange rates. The
VAR of the combined foreign exchange position represents a
potential loss in pre-tax earnings that was estimated to be
¥33.1 billion as of March 31, 2007 and ¥44.3 billion as of March
31, 2008. Based on Toyota's overall currency exposure (includ-
ing derivative positions), the risk during the year ended March
31, 2008 to pre-tax cash flow from currency movements was on
average ¥47.0 billion, with a high of ¥53.8 billion and a low of
¥41.9 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. The potential decrease in fair value resulting from a
hypothetical 100 basis point upward shift in interest rates would
be approximately ¥99.5 billion as of March 31, 2007 and ¥110.6
billion as of March 31, 2008.
There are certain shortcomings inherent to the sensitivity
analyses presented. The model assumes that 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 peri-
ods to repricing, they may not react correspondingly to
changes in market interest rates. Also, the interest rates on cer-
tain types of assets and liabilities may fluctuate with changes in
market interest rates, while interest rates on other types of
assets may lag behind changes in market rates. Finance receiv-
ables are less susceptible to prepayments when interest rates
change and, as a result, Toyota’s model does not address pre-
payment 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-
ferrous 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 available-
for-sale equity securities was ¥1,679.8 billion as of March 31,
2007 and ¥1,177.0 billion as of March 31, 2008. The potential
change in the fair value of these investments, assuming a 10%
change in prices, would be approximately ¥168.0 billion as of
March 31, 2007 and ¥117.7 billion as of March 31, 2008.
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