Which system is prone to speculative attack on a currency?

Option 1 -> Fixed exchange rate systems maintain currency at a specific value, making them vulnerable to speculative attacks when the peg seems unsustainable.

Option 2 -> Flexible exchange rates adjust freely to market forces, so there's no fixed peg for speculators to attack.

Option 3 -> Managed floating allows market determination with occasional intervention, making it less vulnerable than fixed systems.

Option 4 -> This is not a recognized exchange rate system; the term is contradictory.

Hence, Fixed Exchange Rate System -> In a fixed exchange rate system, the government commits to maintaining the currency at a predetermined rate. This creates an opportunity for speculative attacks when traders believe the peg is overvalued or unsustainable. Speculators can sell the currency in large volumes, forcing the central bank to deplete foreign reserves to defend the peg. If reserves are exhausted, the peg collapses. Historical examples include the 1992 attack on the British pound by George Soros and the 1997 Asian financial crisis. Flexible systems avoid this vulnerability as rates adjust naturally to market pressures. -> correct

NTA has marked Option 1 as correct. Only those who have chose that will be awarded marks.