Bally Technologies intends to keep cashing in on theglobal popularity of gaming but wants to keep gambling out of itstreasury. Like many middle-market companies, the $880 milliondesigner, manufacturer and distributor of gaming devices is makingmoney in a precarious global market where currencies swing wildlyin value, often daily, and one major currency's survival may be indoubt. So Scott Edgeworth, the Las Vegas-based company's controllerfor treasury and risk management, is hedging its bets, somethingthat seemed unnecessary until three years ago.

As business has become more global and the perils of leavingmajor currency positions unhedged have grown ominous, treasury proslike Edgeworth are searching for hedging solutions that provide theright balance of automation, outsourcing and personalattention.

Even on a modest scale, personal attention is essential, soBally brought in Edgeworth, aCPA with banking and investment company experience, 2½years ago, partly to organize its first currency hedgingprogram.

The scope of the project was modest: Bally had large exposuresto the volatile euro and smaller, occasional exposures to the SouthAfrican rand that called for hedging. None of the other currenciesit dealt in were volatile enough or involved exposures large enoughfor 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 onlyinterest-rate hedge is a swap locked in for the life of a termloan. That leaves the focus on FX.

Bally's forex trading did not require significant automation orportals. “We don't have the scale yet to require or justify tradingsystems,” Edgeworth says. The company primarily uses long-durationhedges of six to 18 months and has three to five hedges in place atany one time. Bally does its trading over the phone with a few ofits banks. Edgeworth is authorized to use options but so far hasfound basic forward contracts to be simplest, cheapest and mosteffective.

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

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

Now Bally actively hedges its balance sheet and is consideringhedging cash-flow exposures. “Hedge accounting will become moreimportant, something Hedge Trackers can assist us with,” Edgeworthsays.

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

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

Good hedging “takes a lot of good informationand a solid understanding about how currencies flow through yourfinancials,” says Helen Kane, president of Cupertino, Calif.-basedHedge Trackers. Balance-sheet hedging deals with transactionsalready booked, Kane explains, while cash-flow hedging involvesanticipated transactions.

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

Treasuries often start with simpler balance-sheet hedging andmay graduate to cash-flow hedging as they gain experience, Kanesays. “But some companies that have low volumes of high-valuepayments may start with cash flow if their margins are degradingbecause of time slippage between order and revenuerecognition.” In some cases, currency hedging starts abruptlywhen a CFO spots a large and unexpected gain or loss, and tells thetreasurer, 'Fix it,' she notes.

On a larger scale, $8.4 billion Gilead Sciences, with a core treasurystaff of seven, is turning to systems to streamline the back end ofits mature balance-sheet and cash-flow hedging program. Gileadtrades through a portal, but the trade information does not yetflow smoothly into its hedge accounting system, reports treasurymanager Karina Inga-Kamienski. So the Foster City, Calif.-basedbiopharmaceutical company is implementing its first treasuryworkstation 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 hedgeaccounting system. It employs a Misys confirmation matching systemto 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 moreautomated,” Inga-Kamienski says. “We want the trade data to flowdirectly from Bloomberg to the workstation.” The Misys system stillwill collect bank data and send it to the workstation. Theworkstation will consolidate and validate all the data and send itto Capella automatically. Once hedge accounting is applied, thedata should upload automatically into Oracle, she explains.

Gilead makes a significant portion of its sales outside theUnited States, primarily in Europe, and actively hedges severalcurrencies, mainly the euro, usually using forwards, Inga-Kamienskisays.

While trading, confirming and accounting for hedges can becomplex, it's a routine process that can be polished. The greaterchallenge is gauging the exposures to be hedged, Inga-Kamienskisays. Like Bally, Gilead does that by coordinating with itsfinancial planning and analysis (FP&A) team and staying inclose contact with local businesses, she says. “We train the localpeople in the various countries so that they understand why we needto know about changes that could affect our exposures.”

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

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