Official Explanation Magoosh:
Usual suspects
Change in meaning
The leopard wraps the tail around its head. Any answer choice that implies that the tail wraps itself around the leopard’s head—as though it were its own entity—changes the meaning and is therefore wrong. Eliminate (C) and (E).
Parallelism
See “unusual suspect”
Unusual suspect
The non-underlined part talks about “two notable functions”. Therefore, the correct answer should have function X AND function Y. And these two parts should be parallel.
This specific error, “two notable functions”, is rare, but the larger class of errors that can loosely be described as take-the-entire-sentence-into-account is common at the higher levels. In other words, answers choices that are grammatically 100% fine but are not the answer because they clash with the context provided by the non-underlined part.
(A) correctly follows the function X AND function Y structure with the parallel “it keeps….it can be”. The Answer.
(B) is grammatically correct but does not adhere to the function X AND function Y structure.
(C) change in meaning, “tail…wrapping around leopard’s head”
(D) The “with the leopard wrapping” structure is wrong here. This is a case of "with" + [noun] + [participle] where you have an action performed by a different actor. The tail is an actor performing an action in the main clause, but the leopard is another actor doing something different inside the "with" structure. See this article for more details.
(E) The first “it” is presumably the tail. Since that is the case, the “tail will wrap the tail around its head” is absurd.
FAQ: Isn't it problematic that in the correct answer choice (A) the "it" refers to the tail and the "its" refers to the leopard?
The reason why "its" can refer to the "leopard" is because the phrase "the leopard will wrap the tail around its head" is a complete sentence clearly set off from the rest of the sentence by the two em dashes ( -- ). This creates what's called a "parenthetical". And within this separated, self-contained sentence, we can distinguish that the antecedent of "its" is the leopard.
Since the parenthetical is just extra information that can be removed, the original sentence without the parenthetical will still make sense:
it keeps the animal warm, and it can be used to dispatch small prey
And from what precedes the colon in the rest of the sentence, it is clear that "it" refers to the tail here.