Explanation

The payout amount in a CDS upon default is calculated as:

Payout = Notional Principal × Loss Given Default (LGD)

Where:

• Loss Given Default (LGD) = 1 - Recovery Rate
• Recovery Rate = the percentage of the notional amount that can be recovered after default

Let's examine the options:

Option A: Recovery Rate - INCORRECT. The payout is based on the loss, not the recovery.

Option B: Loss Given Default - CORRECT. This represents the actual loss amount that the protection seller pays.

Option C: Probability of Default - INCORRECT. This is a probability measure, not the actual loss amount.

Therefore, the payout equals notional principal multiplied by the loss given default.