Inside Asian Gaming

INSIDE ASIAN GAMING | January 2009 16 In Focus mathematics. If a game of chance has a certain theoretical house edge, that house edge‘will out’in the long run. As IAG has said enough times to risk boring our readers, the mitigation of volatility risk in table games such as baccarat is to a certain extent an illusion designed by casino managements to smooth returns and placate the mood particularly of institutional shareholders who tend to prefer quick and smooth returns over short investment cycles. School of hard knocks A second point worth making is that if the recent meltdown in the financial markets proves anything, it’s that there is no such thing as complete mitigation of risk in any market. Some of the financial derivatives products sold to Hong Kong’s high net worth community as hedges against equity price volatility were themselves so oversold that they created a mini bubble that burst spectacularly when the markets crashed in the fourth quarter of 2008. These ‘accumulator’ derivatives have now been bitterly nicknamed ‘I’ll kill you later’products by some of those who lost out. A third point to make is the ‘volatility hedge arrangement’ mentioned by Ms Tang isn’t exactly an innovation. Simon Dewhurst, MPEL’s Executive Vice President and Chief Financial Officer, was talking about volatility management as long ago as MPEL’s Q1 2008 earnings conference. He pointed out that hedgingagainstvolatilityisstandardpractice for casinos with high-roller operations. Here’s what Mr Dewhurst said: “In our business, risk mitigation straddles a wide array of concern, including table hold volatility. There are a number of things that we can do to mitigate the impact of table hold volatility and we believe that this is especially important for us given that we have one property [Crown Macau] that currently delivers the vast majority of our revenue and earnings. And that property caters to the most volatile segment of the market [the VIP sector] with respect to luck. Pump up the volume “The most effective way to reduce table hold volatility is to increase volume. Since the commencement of operations by AMA in mid-December [2007] and the commensurate increase in rolling chip volume, the volatility and our daily rolling chip table hold percentages dropped as expected,” added Mr Dewhurst. The headline-grabbing offer of 1.35% rolling chip commission helped Crown Macau grab around 18% of Macau’s entire VIP baccarat business by the end of the first quarter of 2008 volatility risk in the baccarat-heavy Macau market, it’s worth making a few points. The first is that one cannot change the laws of probability or the laws of