Both ways you mentioned can be used. But what I did was make up my own Chinese name. I took two things that I like, the ocean and the color purple, and put the two of them together to form my Chinese name. 紫-purple 大海-ocean(literally big sea) And since a Chinese name usually has three characters this worked out perfectly for me. As for finding the pinyin, I looked asked my Chinese friend since at the time I was in college and was just starting to learn Chinese, but you can look up the words if you want. Any dictionary will provide with the pinyin.

Most foreigners in China who have Chinese names made them up or had a Chinese friend/teacher make something up (highly suggest that method if you want something that doesn't sound funny) and the names aren't necessarily a total match phonetically or in meaning. Just something they liked. However, you can expect Chinese people to just use a phonetic transliteration anyway, especially if you have a common name they have seen transliterated before. My name is Kaitlin and people at my company pretty much call me 凯特林 (kai te lin) if they want to use a Chinese name for me, although I have a different "official" Chinese name. And most of the time they just call me some mangled version of Kaitlin and skip the "Chinese name" part. :-)

In Chinese foreign friend's name, mostly according to know someone like Obama in the China he called 奥巴马 in for example Jobs in Chinese called 乔布斯

they have their names translated by pronunciation or get a complete new name (given by Chinese friends or colleagues)