1. He said to me, "You will fail in the exam." -direct narration-

2. He told me that I should fail in the exam. -indirect narration-

3. He told me that I would fail in the exam. -indirect narration-
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#1 can be changed into #2 or #3. which one is correct? Do we have to use 'should' or 'would'?

1 answer

All are grammatical, but they do not mean exactly the same thing. Look up "would", "should," and "will":

http://www.mirriam-webster.com