Is there a difficulty that must be chosen as there is no filter option for Difficulty selection.

No other gun but the standard handgun is said to be used can it be upgraded with parts?

Only 2 questions I have about this category.

The current difficulties are "Standard" or "Hardcore" Yes it can be upgraded :)

Also another question out of habit I grabbed a flash grenade this run, as long as I don't use it or use it as self-defense, run is fine?

You should be okay if you don't use it. It says you can't use self defense items, not that you can't have them in your inventory.

As long as you do not use that item you're good

New question, it states defensive items are not allowed, and no other weapons are allowed besides Rocket Launcher @ end fight Leon A. Can I use the knife for things like Birkin fight, as in they only can't be used in defensive ways? Can I use them in an offensive manner?

no, only the Handgun can be used with exception of the Launcher on Leon's scenario. no other Items offensive or defensive can be used.