A portfolio consists of one (long) 100 million asset and a default protection contract on this asset. The probability of default over the next year is 10% for the asset, 20% for the counterparty that wrote the default protection. The joint probability of default for the asset and the contract counterparty is 3%. Estimate the expected loss on this portfolio due to credit defaults over the next year assuming 40% recovery rate on the asset and 0% recovery rate for the contract counterparty.
If expected loss of a portfolio is:
Default Probability x Loss Given Default x Exposure at Default
How can I use this formula to solve this problem? Or can this equation be used if we are not given an exposure amount for the contract?