Correct option is D
Let's break down the statement carefully:
William says, "Her only sister is the mother of my daughter's mother."
"Her only sister" refers to the sister of the woman in question.
"The mother of my daughter's mother" refers to the mother of William's wife (since "my daughter's mother" is William's wife).
So, the woman's only sister is William's mother-in-law.
Since the woman is the sister of William's mother-in-law, the woman must be William's wife's sister, i.e., his sister-in-law.