Funding risk is not a risk class as defined under the sensitivities-based method in the standardized approach to capital requirement calculation. The sensitivities-based method defines seven risk classes, which are: General interest rate risk, Foreign exchange risk, Commodity risk, Equity risk, Credit spread risk – non securitization, Credit spread risk – securitization, and Credit spread risk – securitization correlation trading portfolio. Each of these classes has a delta risk charge, vega risk charge, and curvature risk charge calculated for it.

Choice A is incorrect. General interest rate risk is indeed a risk class as per the definitions provided by the sensitivities-based method. It refers to the potential for losses due to changes in interest rates that affect financial instruments.

Choice B is incorrect. Foreign exchange risk also falls under the risk classes defined by the sensitivities-based method. This type of risk arises from changes in currency exchange rates, which can impact investments and financial transactions.

Choice C is incorrect. Commodity risk is another recognized category under the sensitivities-based method's classifications of risks. It pertains to potential losses resulting from fluctuations in commodity prices, such as oil or gold.

Things to Remember

• The standardized approach is one of the methods used by banks to calculate their capital requirements based on regulatory guidelines.
• The sensitivities-based method within the standardized approach focuses on measuring the impact of changes in market risk factors on a bank’s portfolio.
• Delta risk charge, vega risk charge, and curvature risk charge are calculated for each risk class under the sensitivities-based method.
• Equity risk and various types of credit spread risks are also included in the risk classes defined by the sensitivities-based method.
• Funding risk, while important for banks, is not considered a risk class under the sensitivities-based method in the standardized approach.