Transaction Exposure: Mercedes Benz And Toyota Motors Corp. Comparison

Mercedes Benz

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Mercedes Benz is an international automobile marque a well as a department of Daimler AG. It is a famous brand for luxury vehicles, buses, coaches, and Lorries. It remains one of the highly celebrated names amongst the Luxury Automobile brands globally. It has been around for over 100 years. Currently, operations are done by Daimler-Benz. It has headquarter in Stuttgart.

Toyota Motor Corp. is a Japanese manufacturer of automotive. It has its headquarter located in Toyota, Aichi, Japan. The company designs, manufactures, assembles as well as sells vehicles (passenger and commercial), minivans, and associated accessories and parts.

Transaction exposure measures losses and gains arising from unanticipated alterations in upcoming cash-flows contracted in a currency-dominated transaction. Uncertainties emerge from the exchange rate alterations’ effects on financial (consolidated) report. It approaches risk of foreign exchange in short-run and hence easy to recognize alongside measure. This permits an increased effectiveness and efficiency in strategies for hedging to stay anticipated. 

Mercedes Benz has a transaction exposure arising from its contract with Eagle Ottawa to supply leather seat interior because the Mercedes Benz is located in Germany and Eagle Ottawa is located in the United States. In this case, Mercedes Benz is the foreign exchange payer. Therefore, Mercedes Benz is exposed to a transaction cost risk from the movements in dollar rates relative to Euro.  Consequently, where the dollar depreciates, Mercedes Benz has to make a smaller payment in Euro terms, but it would pay a larger amount in Euro if the dollar appreciates (Chan, Gan and McGraw 2015).  

Mercedes Benz is also involved in a transaction exposure arising from its contract with Inteva Products to supply sunroofs. Since Mercedes Benz is situated in Germany and Inteva Products is situated in the United States, this leads to a transaction exposure between the two countries’ exchange rates.  This, therefore, means that Mercedes Benz is the payer of the foreign exchange. Hence, Mercedes Benz is exposed to transaction cost risk from the dollars rates movement comparative to Euro. Mercedes Benz will hence pay less in terms of Euro if the dollar depreciates to purchase the sunroofs from Inteva Products. However, it will pay more in terms of Euro if the dollars appreciates. 

Mercedes Benz has a transaction exposure emerging from its contract with Nemak to supply cylinder heads. This is because Mercedes Benz is situated in Germany and Nemak is situated in Mexico hence difference currencies, that is, Euro and Mexican peso respectively. Because this is a buy side transaction, Mercedes Benz remains the payer of the foreign exchange in order to acquire the cylinder heads. Thus, Mercedes Benz will pay more in terms of Euro when the Mexican peso appreciates. However, Mercedes Benz will pay less in terms of Euro in case the Mexican peso depreciates to purchase the cylinder heads from Nemak.   

Toyota Motors Corp.

This part discusses the transaction exposure of Toyota Motor Corp. It measures alterations in unsettled financial obligations value spent by Toyota before an alteration in rates of exchange yet not due for settlement till after rates of exchange alters. Hence, it is dealing with alterations in cash-flow resulting from prevailing contractual obligations (O'Brien 2016).

Toyota has a transaction risk exposure which arises from its supply chain. For example, Toyota gets its supplies from Tesla Motors in the United States.  Tesla Motors has previously signed a $100 million contract to supply Toyota with the power for RAV4 EVs. This leads to a transaction exposure between the two countries exchange rates. For example, being a buy side transaction, Toyota, located in Japan in this case, has a contract with Tesla Motors, located in the United States to purchase power for RAV4 EVs at a product fixed price of $100 million at the point of contract signing. In this case, Toyota is the foreign exchange payer and hence is exposed to a transaction cost risk from the movements in dollar rates relative to Yen.  Thus, where the dollar depreciates, Toyota has to make a smaller payment in Yen terms, but it would pay a larger amount in Yen if the reverse holds.  

Toyota Motors Corp. also has a transaction exposure arising from its contract with Samsung Electronics for the creation of a Car-Mode-App connecting Samsung Smartphones to radios of Toyota. The transaction exposure arises between the two countries’ exchange rate changes that is South Korean and Japanese exchange rates. Toyota remains the payer of the foreign exchange and hence exposed to the transaction cost risk from the movements in Won rates relative to Yen. Therefore, where the Won depreciates, Toyota has to make a smaller payment in Yen terms, but it would pay a larger amount in Yen if Won appreciates.  

Toyota Motors Corp. also has a transaction exposure arising from its contract with the Bridgestone Americas to supply tires for the Toyota EJ Cruiser model. In this case, being a buy side transaction, Toyota, located in Japan in this case, has a contract with Bridgestone Americas located in the United States to purchase Bridgestone Americas at a product fixed price at the point of contract signing. Here, Toyota is the foreign exchange payer and hence is exposed to a transaction cost risk from the movements in dollar rates relative to Yen.  Thus, where the dollar depreciates, Toyota has to make a smaller payment in Yen terms, but it would pay a

Transaction Exposure

Mercedes Benz uses financial hedging tool by creating financial cash-flow for an off-setting account via lending or borrowing in currency in the exposed firm. For example, Mercedes Benz uses certain types of proactive policies including back-to-back loans as seen in its contract with Nemak to supply cylinder heads. Back-to-back loan is used in Mercedes Benz where it coordinates with another foreign firm to borrow one another’s currency for a given time period. The two firms subsequently return borrowed currencies at an agreed expiry date.

Mercedes Benz uses different hedging strategies as tools and methods to deal with transaction exposure. The company hedges this exposure via contractual, natural, operating and financial hedges once it has determined its individual for risk alongside Mercedes Benz’s anticipations attributed to course exchange rate will be assuming. Its techniques (contractual) includes forward policies hedge that means comparative hedging. Mercedes Benz also hedges through currency swap. Here, a swap dealer agrees with Mercedes Benz to exchange a corresponding amount in 2 distinct currencies.  For example, Mercedes Benz enters a swap paying Euro and in turn receives dollars for a given time duration when it dealt with Inteva Products to supply sunroofs. 

Mercedes Benz has re-invoicing centers, distinct corporate subsidiaries serving parent/associated unit in 1 destination and each foreign subsidiary. This center is receiving invoices coming from these subsidiaries. A center subsequently assume legal good’s title sold to subsidiaries distributing and managing each transaction exposure for sales of intracompany (Khindanova 2015).  For example, this was the case between Mercedes Benz and Eagle Ottawa to supply leather seat interior.

Toyota uses an operating hedge whereby it creates an operating cash-flow for off-setting account. For instance, payable account was created to service its contract with Bridgestone Americas to supply tires for the Toyota EJ Cruiser model. It undertakes the implementation of such a strategy via a range of techniques amongst them; lags, invoice currency and leads in payment terms alongside exposure netting. Invoice currency hedging allows the firm Toyota to shift exposure by invoicing overseas sales in Yen. It can also share this risk-exposure between Yen and foreign currency (Rupeika-Apoga and Nedovis-Uraev 2015). It also invoices sales in market basket index to diversify exposure risks.   

Leads as well as lags hedging enable Toyota to decelerate or accelerate payment made in foreign currency timing as seen in its contract with Samsung Electronics for the creation of a Car-Mode-App. It remains effective for Toyota whereby it anticipates either appreciation or depreciation in currency against another. Exposure netting technique submits that Toyota must never consider its transaction in seclusion, stressing in its place on hedging firm in a currency portfolio position (Tsai et al., 2014). This implies that Toyota needs to consider overall payments or receipts which have to be done or received once it has considered opposite operations which naturally edge one another.

Hedging Strategies

Toyota Motors Corp. also uses financial hedging tool whereby it creates financial cash-flow for off-setting account by lending or borrowing currency in the firm Toyota it is exposed.  Policies (proactive) such as back to back loans together with swaps are used in currency. The former is used in Toyota where it coordinates with another foreign firm to borrow one another’s currency for a given time period (Brooks 2015). Both Toyota and the foreign firm subsequently return currency borrowed at stated deadline. It involved in hedging through swap by agreeing with swap dealers to exchange a corresponding amount in two separate currencies. An example is where Toyota entered a swap thereby paying Yens and received dollars for a given time duration to buy the power for RAV4 EVs from Tesla Motors (Di-Iorio and Faff 2015). 

Critical evaluation & Conclusion

Based on the above evaluation, it is clear that both the companies have put in place better methods or exposures to deal with the transaction exposures arising from their global trade. They have both similarities and difference in terms of these methods. In my view, because both companies have effectively applied hedging strategies as the methods to deal with transaction exposures, it is implied that they have tried to effectively deal with transaction exposure risk due to the currency movements in the countries that supply them with parts and accessories. In my opinion, Toyota Motors Corp. tends to have better methods than Mercedes Benz. The main reasons as to why I say this is that; besides the strategies in place for Mercedes Benz, Toyota Motors Corporation further uses some strategies that are not used by Mercedes Benz (Ahmed 2015).

For example, whereas Mercedes Benz has not hedged with leads and lags, Toyota has effectively used this method thereby allowing Toyota to accelerate/decelerate timing of payment made in overseas currencies more efficiently than Mercedes Benz. This tool is efficient for Toyota where a currency is anticipated to depreciate or appreciate against another (Aabo 2015).  Thus unlike Mercedes Benz, this method of exposure netting has ensured that Toyota Motors Corporation effectively not to regard its transactions in sequestration by emphasizing instead to hedge the company in a currency position portfolio.   

References

Aabo, T., 2015. Corporate Hedging of Price Risks: Minimizing Variance or Eliminating Lower?Tail Outcomes?. Journal of Applied Corporate Finance, 27(1), pp.57-62.

Ahmed, L., 2015. The effect of foreign exchange exposure on the financial performance of commercial banks in Kenya. International journal of scientific and research publications, 5(11), pp.115-120.

Brooks, R., 2015. Financial management: core concepts. Pearson.

Chan, K.F., Gan, C. and McGraw, P.A., 2015. A hedging strategy for New Zealand's exporters in transaction exposure to currency risk.

Di Iorio, A. and Faff, R.W., 2015. The effect of intervaling on the foreign exchange exposure of Australian stock returns.

Khindanova, I., 2015. Analysis of Foreign Currency Transaction Exposure Using Simulations. The Journal of Applied Business and Economics, 17(4), p.46.

O'Brien, T.J., 2016. Houston Marine Electronics: International Finance Case on FX Transaction Exposure. Browser Download This Paper.

Rupeika-Apoga, R. and Nedovis Uraev, R., 2015. The Foreign Exchange Exposure of Non-Financial Companies in Eurozone: Myth or Reality. International Journal of Economics and Business Administration, 3(1), pp.54-66.

Tsai, I.C., Chiang, M.C., Tsai, H.C. and Liou, C.H., 2014. Hot money effect or foreign exchange exposure? Investigation of the exchange rate exposures of Taiwanese industries. Journal of International Financial Markets, Institutions and Money, 31, pp.75-96.