Methods and Tools Used by Toyota Motor Corporation

This article discusses the methods and tools used by Toyota Motor Corporation to hedge against foreign currency fluctuation risks. It explores the use of foreign currency forward contracts and options contracts, as well as the advantages of forward contracts in managing currency risk. The effectiveness of these risk management tools in covering the currency exposure of Toyota is also examined.

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1. Methods and Tools Used by Toyota Motor Corporation
To hedge against any foreign fluctuation of currency, Toyota Motor Corporation uses the
foreign currency forward contracts to hedge against risks. The second method that the
corporation uses to mitigate risk against foreign currency fluctuation is called the foreign
currency options contracts (Lien, et al 2015).In actual sense, the Japanese currency will face
slight valuations in value of the pound, the euro, the dollar, the Swiss franc and even the
Australian dollar. All currencies affecting the value of the yen is exposing Toyota to fluctuations
in value (Chkili, 2016). For Toyota corporation , the risk managers can hedge against either the
currency futures or the options.
Toyota is an international corporation which has faced a lot of exposures in its currency in
relation to selling, purchasing and funding in different countries. The harzard in foreign currency
in Toyota is related to future assets, liabilities and net income. Toyota is highly profitable in
Europe and America so the US dollar highly impacts the foreighn exc. (Möllmann, et al, 2019).
hange currency harzard. Toyota has over the years employed derived functions in fiscal
instruments to pull off the exposure to foreign currency exposure. In Toyota portfolio, the
derivative involvement in currency rate understanding in rate of options and pulling their
planetary hazard.
Changes in echange rates affect Toyotas operating costs, income of running , net income,
gross borders, and the net maintained incomes. tOyota uses the forward contract method in
fudging foreign exchange forward that are mostly associated with trade recievable denominated
in US dollars. The company enters into the foreign currency contracts to hege of the net
investments, forecast in foreign currency, interchange the foreign rate of fluctuations on assets

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and liabilities. The hedging in forward contracts reduces the foreign exchange risks while dealing
with in different countries by managing gross in the foreign currency that the exchange is
denominated in. Toyota uses hedging against foreign currency exposure by the use of currency
forward contracts. The corporation may use the direct forward hedging if the receivables and the
payables are dominated by foreign currency in the contract available. If this does not work, the
corporation uses the cross forward hedging (Maples, et al, 2017).
Advantages of forward contracts in managing currency risk
The nature of competition among firms has increased as the firm engages in international
trading while also increasing the exchange rates volatility. The advantages are that the existence
of foreign exchange risks which are unavaoidable has brought in the development of different
types of foreign risk exchange. The volatility of exchange currency has led to innovativeness in
forward contracts that has been brought about by risk management tools(Maples, et al, 2017).
The analysis of the forward contract and the currency risks decides the instrument to choose in
foreign exchange risk. It is therefore desirable to predict the magnitude and direction of future
spot rate which is used in optimization of effectiveness of futures and options. The effectiveness
of hedging may differ depending on the alternate risk management tools. Toyota corporation can
either use the forward contract as a hedge instrument that will match the risk profile of the
currency underlying position as close as possible. (Majdoub, and Sassi, 2017).
This study measures the effectiveness of Toyotas risk management tools and the
uncovered positions in currency. Currency futures and forward contracts in Toyota results show
how effective currency futures are and how effective they cover the hedge. Since the
management is concerned with exposure of currency the forward conracts and the futures and

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options are some of the tools used by Toyota. Toyota has choosen the two methods due to the
match that the instruments have over the risk profile and the position that is underlying.
2. Methods and Tools Used by Disney world Corporation
Tools/ method 1: foreign currency forward contracts
This is a method used by Disney to hedge against fluctuation of currency risks. Disney is
able to safeguard the value of its assets and liabilities and foreign currency transactions and
fluctuations. Forecasted foreign transactions for Disney do not exceed four years within the
range of annual exposure. Profit and losses incurred on the contract offset the changes in US
government equivalent in relation to the foreign currency transacted in. Disney also uses
currency swaps so that it ensures that there is effectiveness in foreign currency dominated
borrowings against US dollar dominated borrowing (Popova. and Simkins, 2015).
Forward currency contracts for Disney works in risk management. It mostly works in
wages and remuneration where Disney has been using forward contracts to cap any increase in
hourly wages for the employees either paid in foreign or local currency which is the dollar.wages
vary in jobs. They also avry with how long an employee has worked with the company. This is
used to hedge against currency fluctuation risks. By designating this option, profits and losses on
both options and futures are differed and recognized in earnings when there is accumulation in
transactions hedged. This is done while offsetting the value changes in foreign currency
transaction. Mitigation of foreign exchange risks exposure with regards to foreign liabilities and
assets ensures exposure of foreign currency domination. In fulfilling the forward cuurnecy

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contract and mitigation of risks, Disney character wage structure starts at $ 8.20 per hour for an
employee and it is maximixed at $13.60. the base pay for a technician working in the
entertainment department starts at $ 14.80 and is maximized at $ 21.60. these are contracts that
Disney has entered to with its employees inmorder to cap any volatility in wage pays due to
currency fluctuations or otherwise. The employees sign contracts that the company will never
default to otherwise there will be a case filled against it.
Advantages of foreign currency options in Disney
For a company like Disney, there are four major advantages of using foreign currency
options. They include;
Options basic- which is an agreement to buy or sell a currency at a fixed price in the
future. Call or simply call options are fixed purchase price while puts are fixed selling price. This
can determine how much the currency will behave and will have no volatility.
Hedging- this is a mitigation of risks from a held asset. Disney can avoid risks of
currency losses by purchasing an option so that in the future during conversion, there will be no
unfavorable risks or losses incurred(Taušer, and Čajka, 2016)..
Leverage- options will give Disney an opportunity to trade in large sums of trades while
investing in small capital upfront.
Liquidity- the ease of Disney to locate the exact security it is interested in buying or
selling. (Robiyanto, 2017). The two corporations may enter into forward contract or future
markets to hedge against currency risks.

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References
Chkili, W., 2016. Dynamic correlations and hedging effectiveness between gold and stock
markets: Evidence for BRICS countries. Research in International Business and Finance, 38,
pp.22-34.
Majdoub, J. and Sassi, S.B., 2017. Volatility spillover and hedging effectiveness among China
and emerging Asian Islamic equity indexes. Emerging Markets Review, 31, pp.16-31.
Maples, W.E., Brorsen, B.W. and Etienne, X.L., 2017. Hedging Effectiveness of Fertilizer
Swaps. In NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and
Market Risk Management, April (Vol. 24).
Popova, I. and Simkins, B., 2015. OTC vs. Exchange traded derivatives and their impact on
hedging effectiveness and corporate capital requirements. Journal of Applied Corporate
Finance, 27(1), pp.63-70.
Robiyanto, R., 2017. The volatility-variability hypotheses testing and hedging effectiveness of
precious metals for the Indonesian and Malaysian capital market. Gadjah Mada International
Journal of Business, 19(2), p.167.
Taušer, J. and Čajka, R., 2016. Hedging techniques in commodity risk
management. Agricultural Economics, 60(4), pp.174-182.
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