XJP receives virtually all its supplies directly from J&J Ltd, which, in turn, invoices all the costs and expenditures in Euros. On the contrary, XJP makes its sales in Chinese Renminbi. Therefore, it has to convert the income made from the sales from the Chinese currency into the Euros so that it can submit its payment to J&J Ltd. This means that the amount XJP pays to J&J is not solely dependent on the value of the supplies it receives from this company, but also on the rate at which the Chinese currency exchanges for the Euro. This system is too risky for a business since when Euro gains value over the Renminbi, the difference in that gain becomes an extra cost for the XJP to meet (Coyle, 2000, p. 40). The situation becomes worse if the rate of exchange keeps fluctuating from time to time since the business cannot make any strategies for profit or even plan to grow its profits.
Therefore, the foreign exchange gains or losses primarily determine the performance of XJP, contrary to the normal business situation, where the performance of any business is determined by the sales and revenues it generates in relation to the costs it incurs in its operations (Kenen, 1994, p. 663). Where there is a financial gain for the local currency (Chinese Renminbi), which would occur in a situation where the exchange rate for the Euro drops, then XJP is in a better position to improve its performance and profits, since it will cover its expenditures at a lower cost. However, if the foreign currency gains over the local currency, XJP will be forced to pay the cost of supplies at higher costs. This will, in turn, reduce its profit margin (Moffett, Stonehill & Eiteman, 2008, p. 254).