3. What is the relationship between actual spot exchange rate, the budgeted spot exchange rate, the forward rate, and the expectations for the Chinese subsidiary's financial results by the U.S. parent company?

It was December 2003, and Paul Young, the financial con- troller of Xian-Janssen Pharmaceutical Ltd (XJP), was preparing for a meeting with the CEO of the company, Christian Velmer, to discuss the 2004 business plan. XIP was Johnson & Johnson's (&) joint venture entry into the Chinese market. XJP was one of J&J's largest single operating companies, and was now expected to close 2003 with Rmb 1.006 billion in earnings ($121.6 million). The CEO of XJP had already passed on corporate's earnings objectives for 2004: Rmb 1.205 billion, just under a 20% increase. Although XJP had performed well in recent years, averaging 20% annual earnings growth despite many challenges including the SARS epidemic in 2003. meeting corporate's objectives this time would be difficult. Many of XIP's direct and indirect expenses had been rising, including foreign exchange losses.