25-01-2021 11:40

Covid-19 was a wake-up call for this company to manage its currency risk

When Covid-19 hit, Finnish furniture company Pohjanmaan Kaluste Oy decided to start hedging its currency risk. The move has allowed the company to set currency worries aside and focus on running its thriving business in challenging times.
Pohjanmaan Kaluste sofas
Harri Pakka, CEO, Pohjanmaan Kaluste Oy

Finnish furniture company Pohjanmaan Kaluste Oy had been steadily growing its American export business in recent years when the US dollar plunged in the wake of Covid-19.

With roughly 15% of its sales in USD, the company quickly decided to implement a risk management plan to protect its bottom line from the wild currency swings.

“The US election was coming up. No one knew what would happen politically or what Covid would bring,” says Pohjanmaan CEO Harri Pakka. “We accepted a certain currency level and used hedging to nail our exchange rate to that.”

Pakka says the goal was “to buy peace of mind and to be able to sleep nights” without having to worry about turmoil in the FX markets.

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.

Harri Pakka, CEO, Pohjanmaan Kaluste Oy

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.

Many companies are behind the ball on their FX risk

Not all small and mid-size businesses have acted to manage their currency risk. A recent study from Nordea finds that almost half of such businesses surveyed in the Nordics have not taken sufficient steps to guard against currency swings. That’s despite the large and unexpected losses many have suffered this year during the pandemic and concerns about company liquidity in the coming months.

Companies report that lack of in-house competence and lack of time are the main barriers to implementing an FX risk management strategy.

Find out more about the study findings here.

Nordea recently introduced AutoFX Hedging, allowing companies to automate their currency hedging in a simple and hassle-free way. Companies set the criteria for their hedging programs, and the currency robot does the rest. 

Asked what advice he would give to other companies navigating these challenging and uncertain times, Pakka says it would be to analyse your risk and make decisions accordingly.

“The worst thing you can do is to not make decisions. You can always correct them if they turn out to be wrong,” he says.

Want to know more about our automated solutions or just get started with currency risk management? 

Explore the full range of automation tools in Nordea’s AutoFX Suite, available in DenmarkSwedenFinland and Norway.

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