TOYOTA MOTOR CORPORATION

A BUSINESS REPORT ON
INTERNATIONAL FINANCE
Word Count: 2,514
 Table of Contents
1. INTRODUCTION.........................................................................................................2
2. REVIEW OF RELEVANT LITERATURES.............................................................3
3. OVERVIEW OF THE COMPANY............................................................................5
4. ANALYSIS SECTION.....................................................................................................7
4.1 How Toyota is Exposed to Foreign Exchange Risk.........................................................7
4.2 Internal and External Mechanism of Exchange Rate Exposure Management............9
4.2.1 Internal Mechanism of Exchange Rate Exposure Management................................9
4.2.2 External Mechanism of Exchange Rate Exposure Management.............................10
5. FUTURE OUTLOOK....................................................................................................11
6. CONCLUSION...............................................................................................................12
References...............................................................................................................................13

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 1. INTRODUCTION
Multinational Companies (MNCs) are subject to a variety of hazards in the modern,
globalized world (Eluka, 2016), including foreign exchange risk, which can have severe
financial repercussions. In the opinion of Anuradha (2019), when MNCs transact in
currencies other than their native currency, they are exposed to currency volatility and are at
risk of foreign exchange risk. The financial effects of exposure to foreign exchange risk on a
multinational firm operating in the manufacturing and general retail sectors will be critically
examined in this research.

We will assess the firm's internal and external strategies for managing currency rate exposure
in order to reduce transaction exchange risk exposure. We will also assess the firm's
management of economic exchange risk exposure in light of the sector and macroeconomic
setting. This report seeks to give senior management a thorough analysis of the exposure to
foreign currency risk and suggestions on how to successfully reduce its financial effects.

We will use information from the multinational corporation's financial statements, as well as
information from other pertinent sources academic journals, to do this report. We can learn a
lot about the financial effects of foreign exchange risk exposure on MNCs by looking at how
the company is exposed to this risk and how it handles it.

The industrial and general retail sectors both contribute significantly to the global economy
and do so in an environment that is both intensely competitive and unstable. Hence, exposure
to foreign exchange risk can have a significant effect on these industries.

In conclusion, this research aims to give senior management a thorough grasp of the financial
ramifications of MNCs' exposure to foreign exchange risk as well as how to successfully
manage this risk. MNCs can reduce the financial costs associated with exposure to foreign
exchange risk and improve their financial performance in a fiercely competitive and unstable
global market by implementing a comprehensive risk management strategy.

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 2. REVIEW OF RELEVANT LITERATURES
Due to the rising globalization of the business, multinational companies (MNCs) are very
concerned about foreign exchange risk. According to Wang (2020), foreign exchange risk has
the ability to significantly impair MNCs' financial performance and financial statements.

The many types of foreign exchange risks and their effects on MNCs have been the subject of
numerous studies. One of the most prevalent types of foreign exchange risk is transaction
risk, which results from the impact of exchange rate fluctuations on MNCs' future cash flows
(Saier, 2018). According to Arize et al. (2018), MNCs can control transaction risk using a
variety of tools, including forward contracts, currency options, and currency swaps.

Ahmed (2015) has also demonstrated that multinational corporations (MNCs) can reduce
their exposure to economic exchange risk by diversifying their operations across a number of
nations and by implementing hedging techniques including natural hedging, which includes
balancing currency inflows and outflows. Additionally, Wanga (2017) show that MNCs can
successfully control economic exchange risk by using financial tools like derivatives.

Research have looked at how foreign exchange risk affects MNCs across a range of sectors,
including manufacturing and retail. For instance, studies by Agubata & Odubuasi (2018) have
shown that exposure to foreign exchange risk can affect the financial performance of
manufacturing companies by altering production costs, selling prices, and fluctuations in
foreign exchange rates. In contrast, exposure to foreign exchange risk can have an impact on
retail businesses by changing the cost of inventory and the price of goods.

Moreover, studies have emphasized the influence of macroeconomic conditions on MNCs'

exposure to foreign exchange risk. For instance, research by Onuoha (2014) demonstrates
that economic indices like GDP growth, interest rates, and inflation can affect currency
exchange rates and, as a result, the financial performance of multinational corporations.

Exposure to foreign exchange risk can have a substantial effect on financial performance in
the manufacturing and retail sectors (Yesim, 2015). For instance, Okika et al. (2018) analysis
of Dutch manufacturing companies revealed that changes in currency rates had a big effect on
their profit margins. According to research by Bello (2013), the stock returns of US-based
retail enterprises were significantly impacted by changes in exchange rates.

A combination of internal and external measures may be used by MNCs to manage their
exposure to foreign exchange risk, according to (Antoci, 2015). He further opined that the

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development of efficient risk management rules, monitoring currency exposure, and
maintaining an appropriate capital structure are examples of internal processes. On the other
hand, external mechanisms involve employing financial tools like derivatives and hedging
methods to control the exposure to foreign exchange risk.

In conclusion, research indicates that exposure to foreign exchange risk is a key worry for
MNCs and can have an effect on their financial performance. MNCs can reduce their
exposure to foreign exchange risk by using a number of methods, such as diversifying their
business models and using financial instruments. Foreign exchange risk exposure can
significantly affect financial performance in the manufacturing and retail sectors,
emphasizing the significance of sound risk management procedures.

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 3. OVERVIEW OF THE COMPANY
With a presence all over the world, Japanese multinational automaker Toyota Motor
Corporation is subject to currency risk. Toyota earned revenue of 27.2 trillion yen and net
income of 2.2 trillion yen (almost $19.6 billion) in the fiscal year 2021 (Toyota, 2021).

Toyota has a significant global presence, with factories and sales locations spread across a
number of continents. Toyota's revenue from Japan in the fiscal year 2021 was 14.9 trillion
yen, or around $102.8 billion, while its revenue from other regions was 12.3 trillion yen, or
roughly $164.5 billion. Due to the fact that it deals in several different currencies, including
the US dollar, euro, and Chinese yuan, the company is significantly exposed to foreign
exchange risk.

Figure 1: The Company’s Presence.

Source: https://www.toyota-europe.com/about-us/toyota-in-the-world

Client Base: Toyota offers a wide range of services to individuals, companies, and
governments all around the world. Globally, Toyota sold over 7.6 million automobiles in the
fiscal year 2021, with North America being the largest market and making up about 31% of
all sales (Toyota, 2021). The company's exposure to foreign exchange risk may hinder its
capacity to set competitive product prices and may have an influence on demand in various
regions.

Foreign Stores: Toyota has a global network of dealerships and sales locations, which is
subject to changes in exchange rates. The corporation generated 9.4 trillion yen (about $75.9

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billion) in sales from North America during the fiscal year 2021, compared to 17.8 trillion
yen (roughly $173.4 billion) from other areas. The cost of goods supplied, pricing choices,
and profitability can all be impacted by currency volatility in different geographical areas.

Figure 2: Operational Activities

Source: https://www.toyota-europe.com/about-us/toyota-in-the-world

Toyota employs a sizable workforce worldwide, numbering about 370,000 people (Toyota,
2021). The cost of labour may be impacted by the company's exposure to foreign exchange
risk, particularly in areas where it has a sizable staff base.

Toyota can use a variety of techniques, including the use of financial instruments, hedging,
and diversification, to reduce its exposure to foreign exchange risk. Additionally, the business
can assess its pricing policies to account for changes in exchange rates, improve its supply
chain to lessen its exposure to currency risk, and investigate new markets to diversify its
sources of income.

In conclusion, Toyota Motor Company is a multinational company with a wide range of

clients, a significant global footprint, and exposure to currency risk. By a variety of measures,
such as financial instruments, hedging, and diversification, the corporation can control
foreign exchange risk. Toyota can minimize the financial effects of foreign exchange risk
exposure and improve its performance in various markets by implementing suitable risk
management procedures.

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 4. ANALYSIS SECTION

4.1 How Toyota is Exposed to Foreign Exchange Risk

Due to its broad activities in several currencies and global presence, Toyota Motor Company
is vulnerable to foreign exchange risk. The company's 2021 financial statements, which offer
information on the financial effects of currency fluctuations, can be used to analyse its
exposure to foreign exchange risk.

Toyota reported fiscal year 2021 revenue of 27.2 trillion yen, or around $267.3 billion, in its
financial records from that year. Of this total, 14.9 trillion yen, or roughly $102.8 billion,
came from Japan, while 12.3 trillion yen, or roughly $164.5 billion, came from other regions.
Toyota uses a number of different currencies, including the US dollar, euro, and Chinese
yuan, putting the corporation at risk from currency fluctuations.

Toyota's operating income is one indicator of how exposed firm is to currency risk. Toyota's
operating income for the fiscal year 2021 was 2.4 trillion yen, or about $22.3 billion. The
business did point out that currency changes reduced operational income by about 225 billion
yen (about $2 billion) (Toyota, 2021). The company's exposure to other currencies, such as
the US dollar, euro, and Chinese yuan, might be blamed for the detrimental effects of
currency fluctuations on operational profits.

Toyota's financial expenses are another indicator of how exposed firm is to currency risk.
Toyota incurred financial costs totalling 27.4 trillion yen ($244.8 billion) in the fiscal year
2021. The business said that currency changes had a net beneficial impact on financial
expenses of about 10.6 billion yen (or $94.6 million) (Toyota, 2021). The company's
exposure to other currencies, such as the US dollar, euro, and Chinese yuan, can be credited
with the favourable effect of currency changes on financial expenses.

Furthermore, included in Toyota's financial statements is the company's exposure to foreign

exchange risk as represented by its balance sheet. Toyota's foreign currency assets and
liabilities totalled 3.3 trillion yen (about $29.5 billion) as of March 31, 2021, and 3.1 trillion
yen (about $27.8 billion). This shows that the company's assets and liabilities are susceptible
to currency fluctuations, which could affect the company's financial situation.

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Figure 3: Results of Operational Activities

Toyota mentions in its annual report that its worldwide supply network exposes it to foreign
exchange risk in addition to its financial statements. The company is susceptible to changes
in currency exchange rates because it sources parts and materials from different areas and
vendors. The company's procurement expenses may increase as a result of this risk, which
could ultimately hurt its financial performance.

In conclusion, because of its wide activities in numerous currencies and global presence,
Toyota Motor Corporation is subject to foreign exchange risk. The company's financial
statements, which display the effect of currency fluctuations on its operating income and
financial expenses, can be used to determine its exposure to foreign exchange risk. The
balance sheet and global supply network of the corporation also put it at risk from currency
fluctuations. Toyota uses a variety of hedges to reduce this risk. Yet, the business may still be
vulnerable to unplanned currency swings, highlighting the significance of sound risk
management procedures.

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4.2 Internal and External Mechanism of Exchange Rate Exposure Management
A global maker of automobiles, Toyota Motor Company has operations in many countries.
As a result, the company is vulnerable to currency rate risks, which may have an impact on
its financial results. Based on the data in Toyota Motor Corporation's annual financial
statement for 2021, we will identify and assess the internal and external exchange rate
exposure management techniques that the company uses to manage the transaction exchange
risks exposure.

4.2.1 Internal Mechanism of Exchange Rate Exposure Management

a) Natural Hedging: Toyota Motor Corporation employs natural hedging to reduce the risks
associated with transaction exchange rates. The business has manufacturing facilities and
sales offices spread all over the globe, supporting its global operations. Because business
receives income in several currencies and pays expenses in various currencies, it naturally has
hedges in place. The corporation lessens the risk of transaction exchange rate risks by
matching the currency of revenues and expenses.

In its 2021 financial statement, Toyota Motor Company, for instance, stated that its
automotive activities brought in JPY 26.7 trillion in revenue, with roughly 46% of that
coming from North America, 29% from Japan, and 25% from other areas. The business also
said that its cost of sales was JPY 23.02 trillion, of which around 42% came from North
America, 29% from Japan, and 29% from other countries. Toyota naturally protect itself from
the risks associated with exchange rates by matching the revenue and cost of sales in various
currencies.

b) Currency Swaps: Toyota also used currency swaps to manage the risks associated with
exchange rates. A financial tool known as a currency swap enables two parties to trade
currencies for a certain amount of time at a predetermined exchange rate. Toyota employs
currency swaps in transactions where natural hedging is impractical to protect against the risk
of currency volatility. For instance, a corporation can employ currency swaps to convert a
transaction denominated in a currency for which it lacks natural hedges into a transaction
denominated in a currency for which it does have natural hedges. The corporation can lessen
its exposure to exchange rate concerns by doing this.

A closer examination of Toyota's 2021 annual financial statement revealed no specific

references to the corporation adopting currency swaps to control its exposure to exchange

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rate fluctuations. To mitigate currency risks, the company has disclosed in prior annual
reports that it utilizes a variety of financial instruments, such as currency swaps.

For instance, Toyota revealed that it employed currency swaps to minimize the currency risks
associated with its international activities in its 2020 annual financial statement. In situations
when natural hedging is not possible, the corporation said that it engages in currency swaps
with financial institutions to protect against currency risks (Toyota, 2020).

4.2.2 External Mechanism of Exchange Rate Exposure Management

a) Futures Contracts:

Toyota employs forward contracts to minimize its exposure to exchange rate risk during
transactions. The company revealed that it has taken into forward contracts with financial
institutions to hedge against currency risks in transactions where natural hedging is not
practical in its 2021 annual financial report. Toyota reduces its exposure to exchange rate
risks by using forward contracts to fix exchange rates for upcoming transactions.

The notes to Toyota's financial statements provide as one illustration of how the company
uses forward contracts. Toyota entered into forward contracts worth JPY 756.6 billion as of
March 31, 2021, according to Note 17 to the consolidated financial statements. In order to
protect against currency risks associated with upcoming transactions denominated in
currencies other than the Japanese yen, these forward contracts were used. Toyota was able to
lower its exposure to anticipated currency changes by entering into these forward contracts
and locking in exchange rates for future transactions.

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 5. FUTURE OUTLOOK
The forecast based on its 2021 annual financial report is that it expects the exchange rate of
the Yen to average 105 and 125 to the United States Dollar ($) and Euro (€) respectively for
the 2022 financial period.

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 6. CONCLUSION
Upon extensively, carrying out this report using the financial statement of Toyota for both
2020 and 2021, it can be deduced that just like any multinational company involved in global
operations; Toyota Motors is not exempted. However, it effectively manages its exposure
through natural hedging, currency swap and futures contract.

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Onuoha, I., 2014. Impact of Exchange Rate Variation and Inflation on the Economic Growth
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Saier, S., 2018. An Investigation of Foreign Exchange Risk Management in Chinese
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