Polishing Forex Hedging

As FX volatility grows, companies look for hedging solutions that provide a mix of automation, outsourcing and personal attention.

Bally Technologies intends to keep cashing in on the global popularity of gaming but wants to keep gambling out of its treasury. Like many middle-market companies, the $880 million designer, manufacturer and distributor of gaming devices is making money in a precarious global market where currencies swing wildly in value, often daily, and one major currency’s survival may be in doubt. So Scott Edgeworth, the Las Vegas-based company’s controller for treasury and risk management, is hedging its bets, something that seemed unnecessary until three years ago.

As business has become more global and the perils of leaving major currency positions unhedged have grown ominous, treasury pros like Edgeworth are searching for hedging solutions that provide the right balance of automation, outsourcing and personal attention.

Even on a modest scale, personal attention is essential, so Bally brought in Edgeworth, a CPA with banking and investment company experience, 2½ years ago, partly to organize its first currency hedging program.

The scope of the project was modest: Bally had large exposures to the volatile euro and smaller, occasional exposures to the South African rand that called for hedging. None of the other currencies it dealt in were volatile enough or involved exposures large enough for active hedging. “We have 10 to 15 currencies that we monitor, but just three to five that we are currently considering to hedge,” Edgeworth says.

Bally has no exposure to commodity prices, and its only interest-rate hedge is a swap locked in for the life of a term loan. That leaves the focus on FX.

Bally’s forex trading did not require significant automation or portals. “We don’t have the scale yet to require or justify trading systems,” Edgeworth says. The company primarily uses long-duration hedges of six to 18 months and has three to five hedges in place at any one time. Bally does its trading over the phone with a few of its banks. Edgeworth is authorized to use options but so far has found basic forward contracts to be simplest, cheapest and most effective.

The hedging process is still too cumbersome for him to do it alone, though. “I understood hedging but never had to build a ground-up program, nor did I previously work as a trader,” Edgeworth notes. “We have subsidiaries all over the world using different accounting systems. It was a real challenge to collect and analyze the data quickly enough to see exposures and hedge in a timely way.”

In additional, there were legal agreements, trading templates and other operational details to attend to, as well as the accounting. “With our lean finance staff and the complexity of the process, I could see that we needed help, so we brought in Hedge Trackers for consulting and kept them on to handle the accounting,” he says.

Now Bally actively hedges its balance sheet and is considering hedging cash-flow exposures. “Hedge accounting will become more important, something Hedge Trackers can assist us with,” Edgeworth says.

But Bally has to meet the big challenge—that of closely tracking events within its global businesses and responding to events quickly with appropriate hedges.

“We will need to work closely with our sales team, with financial planning and analysis, and with our local subsidiaries to adjust our forecasts as accurately and timely as possible so we can execute the best hedging strategies,” Edgeworth explains.

Good hedging “takes a lot of good information and a solid understanding about how currencies flow through your financials,” says Helen Kane, president of Cupertino, Calif.-based Hedge Trackers. Balance-sheet hedging deals with transactions already booked, Kane explains, while cash-flow hedging involves anticipated transactions.

Companies usually use forwards to hedge balance sheets and forwards, options or collars for cash-flow exposures, she says. “It’s rare to see structured instruments because they generally don’t qualify for hedge accounting treatment.”

Treasuries often start with simpler balance-sheet hedging and may graduate to cash-flow hedging as they gain experience, Kane says. “But some companies that have low volumes of high-value payments may start with cash flow if their margins are degrading because of time slippage between order and revenue recognition.”  In some cases, currency hedging starts abruptly when a CFO spots a large and unexpected gain or loss, and tells the treasurer, ‘Fix it,’ she notes.

On a larger scale, $8.4 billion Gilead Sciences, with a core treasury staff of seven, is turning to systems to streamline the back end of its mature balance-sheet and cash-flow hedging program. Gilead trades through a portal, but the trade information does not yet flow smoothly into its hedge accounting system, reports treasury manager Karina Inga-Kamienski. So the Foster City, Calif.-based biopharmaceutical company is implementing its first treasury workstation to go with its Oracle ERP system.

Gilead downloads trade data from Bloomberg into an Excel file, and formats and uploads them into Capella, the Hedge Trackers hedge accounting system. It employs a Misys confirmation matching system to collect trade information from the bank side of transactions, confirm it and store the data.

“Once we get the workstation running, the process should be more automated,” Inga-Kamienski says. “We want the trade data to flow directly from Bloomberg to the workstation.” The Misys system still will collect bank data and send it to the workstation. The workstation will consolidate and validate all the data and send it to Capella automatically. Once hedge accounting is applied, the data should upload automatically into Oracle, she explains.

Gilead makes a significant portion of its sales outside the United States, primarily in Europe, and actively hedges several currencies, mainly the euro, usually using forwards, Inga-Kamienski says.

While trading, confirming and accounting for hedges can be complex, it’s a routine process that can be polished. The greater challenge is gauging the exposures to be hedged, Inga-Kamienski says. Like Bally, Gilead does that by coordinating with its financial planning and analysis (FP&A) team and staying in close contact with local businesses, she says. "We train the local people in the various countries so that they understand why we need to know about changes that could affect our exposures."

The partnership between Gilead’s treasury and FP&A is a close one. “There might have been a time when we would have pulled each other’s data,” Inga-Kamienski says. “But that leaves blind spots, and we can’t afford blind spots anymore.”

 

For more recent coverage, see Derivatives: Not Just for Hedging.

 

 

 

 

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