  This paper investigates the hedging performance of pegged foreign exchange
market in a regime switching (RS) model introduced in a recent paper by
Drapeau, Wang and Wang (2019). We compare two prices, an exact solution and
first order approximation and provide the bounds for the error. We provide
exact RS delta, approximated RS delta as well as mean variance hedging
strategies for this specific model and compare their performance. To improve
the efficiency of the pricing and calibration procedure, the Fourier approach
of this regime-switching model is developed in our work. It turns out that: 1
-- the calibration of the volatility surface with this regime switching model
outperforms on real data the classical SABR model; 2 -- the Fourier approach is
significantly faster than the direct approach; 3 -- in terms of hedging, the
approximated RS delta hedge is a viable alternative to the exact RS delta hedge
while significantly faster.
