From the September/October 2012 issue of Treasury & Risk magazine

Bronze AHA Winner in Liquidity Management

Adding FX Forecasts to Cash Flow Models: Toyota Financial Services


Toyota Financial Services (TFS) found an innovative way to improve its cash forecasts and finetune its short-term investment portfolio. “We added foreign exchange rate forecasts to our cash-flow models,” explains Nicholas Ro, national manager for sales and trading.

The objective was to estimate future collateral movements based on changes in foreign exchange rate forecasts. In 2011, TFS became the first corporate treasury to perform daily collateral exchanges with zero credit thresholds and same-day settlements with its counterparties. Adjusting collateral daily reduced counterparty risk but increased uncertainty over how much daily liquidity the company needed in its short-term investment portfolio. If the dollar appreciated, TFS would have to send collateral, and if it depreciated, TFS would receive collateral, Ro explains.

The more accurately TFS could anticipate rate changes and build those expectations into its cash forecast, the more cash could be invested instead of being held for daily liquidity, Ro says. TFS has a $100 billion derivatives portfolio with over $20 billion in cross-currency exposure, so the stakes justified the effort.

To forecast currency movements, TFS used Bloomberg’s FX forecasting model and its range-of-future-expectation scenarios. Analysis showed that the Japanese yen, the euro and British pound’s relationships versus the U.S. dollar explained 85% of changes in cross-currency swap valuations. By moving excess liquidity into longer-dated investments, TFS was able to improve its return by 25 basis points and investment income by $10 million, he says.

Previously, TFS treasury gave the investment team bimonthly estimates of collateral movements. Now it provides a daily reading. Marking the portfolio to market daily reduced the potential for large, unexpected cash flows, Ro notes.

“Integrating this new variable into our cash flow models gave us a clearer understanding of how much operating cash was needed to provide adequate liquidity for potential daily collateral movements,” Ro summarizes. “By increasing the reliability of our cash flow estimates, TFS was able to use excess liquidity to invest in core cash investments.”