A Dynamic Approach for Pricing Options on Interest Rate in Uruguay

Andres Sosa Rodriguez, Ernesto Mordecki and Guillermo Magnou

Revista Brasileira de Economia - RBE, 2025, vol. 78, issue 4

Abstract: The large volume of the debt market and the non-development of the derivatives oninterest rate makes the subject of pricing options interesting and relevant for the financialsystem in Uruguay. In this paper, we provide a dynamic model for derivative pricing oninterest rate denominated Gaussian Affine Term Structure multidimensional model. For themodel we describe the underlying mathematics and the procedure statistics using historicalbond price data. For the implementation it necessary applied the Kalman Filter with anExpectation-Maximization algorithm. In the application, we select different financial assetsprice series in dollars and CPI-Indexed. After the pricing, we compare our results with thebenchmark BDT-model. Results show some differences with the classical model and suggestthe need to apply multidimensional models to measure the risk of interest rate increases ordecreases.

Date: 2025
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