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.

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