It should be noted that Water is neither singular nor plural; it is uncountable. The author must have overlooked the usage of "quantities" with water, but this is however grammatically wrong. Anyways, let's picture the solution from another angle of "Quantities" which mean "much" a plural and must be used with a plural verb "HAVE" to make a meaningful sentence construction.

OPTION A - CORRECT
From a logical viewpoint, the combined usage of the plural "HAVE" with "QUANTITIES" makes the underlined phrase correct.

OPTION B - INCORRECT
The plural "objects" and "they" in the underlined portion do not match with the singular "object" in the non-underlined portion. Additionally, the pronoun 'they' has no antecedent. This thus gives the sentence a different meaning.

OPTION C - INCORRECT
"Has" must be "Have". Also, "quantities" violate the subject-verb agreement.

OPTION D - INCORRECT
There is a change in meaning here. Emphasis given to the "quantities" is to be considered instead of those quantities of water displaced.

OPTION E - INCORRECT
Wordy and not crisp in meaning. Therefore, the valid direct object of the verb "replaces" is "quantities"... It's not logical.