Explanation

In a credit default swap (CDS):

• The protection seller takes on the credit risk and agrees to compensate the protection buyer if a credit event occurs
• The protection seller receives periodic premium payments (not a one-time upfront payment)
• When a credit event occurs, the protection seller pays the notional value of the security (or the loss amount) to the protection buyer
• The protection seller is short credit risk (not long), as they benefit when the reference entity's credit quality improves

Therefore, option C is correct: the protection seller pays the notional value of the security in the event of default.