Option 1 -> This describes a disadvantage (speculative attacks), not a merit of flexible exchange rates.
Option 2 -> This is a merit - automatic BoP adjustment through exchange rate movements.
Option 3 -> This is a merit - monetary policy independence is a key advantage.
Option 4 -> This is a merit - flexible systems don't require large forex reserves.
Hence, Option 1: Exchange rates are prone to speculative attack on a currency. -> This is NOT a merit but rather a demerit of the flexible exchange rate system. Under flexible exchange rates, currencies can be vulnerable to speculative attacks and excessive volatility, which can destabilize the economy. The other three options are all genuine merits: automatic BoP adjustment, monetary policy independence, and reduced need for forex reserves are all advantages of flexible exchange rate systems. -> correct