A layered hedging approach
Due to its US currency exposure, when the volatility of the dollar against the euro started to spike after the spring of 2019, Pohjanmaan decided to secure its USD currency level using a so-called “layered hedging” approach.
Under that approach, a company decides what amount of currency it would like to lock in, looking a year into the future. For example, if a company decides to hedge 100 USD, it would hedge 25% of it to three months, 25% to six months, 25% to nine months and 25% to 12 months. In a one-year approach, the company ends up having four hedges going simultaneously, each with different maturities. Each quarter consists of hedges done in different periods, in different market environments, which yields a smoother exchange rate.
“For Pohjanmaan, it means we contact them every quarter and make the new hedges,” says Nordea Markets’ Jussi Välimaa. “They get less volatility and more stable USD income.”
Välimaa says he had discussed the idea of implementing FX hedging with Pohjanmaan for a couple of years, but it was the turmoil from the pandemic, combined with the upcoming US election, that persuaded the company to act.
“We wanted a worry-free solution for the currency volatility that would allow us to concentrate on worrying about other things,” says Pakka.
Freeing up time for the core business
There have been plenty of other things to worry about, according to Pakka. In mid-March, after the pandemic hit, business ground to a sudden halt, requiring quick decision-making. The company decided to temporarily close two of its factories and cut a third back to working three days a week.
That continued for a while until business started to pick up again in the summer, and the factories reopened one by one. With people largely homebound and unable to travel, consumers were investing more in their homes, and furniture sales started to pick up dramatically.
“The market has actually been quite hot, and the autumn has been one of the busiest times ever,” says Pakka. However that quickly led to other challenges, including shortages of materials, from foams and mechanisms to upholstery materials.
Combined with disruptions to supply chains and international transport due to the pandemic, those material shortages are currently the biggest obstacle to the company’s growth, Pakka says.
“It has been quite a year, and in the end, it seems it will have been quite a good year. It has certainly helped having the currency worries set to the side,” he adds.