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Answer: the loss given default.
## 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.
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In the event of default, the payout amount for a credit default swap (CDS) is equal to the notional principal multiplied by:
A
the recovery rate.
B
the loss given default.
C
the probability of default.
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