Grendel and his mother live in the

Grendel's mother lives in a cave beneath what is called a mere.

Explanation:

A mere is a 12th Century term for a standing body of water.  The Old English term can mean a lake, but given the amount of time it takes Beowulf to swim to the cave at the bottom, the usage meaning sea-like lake might be closer to the original intent.  This means that the lake may have been an arm of the sea coming inland.  The fact that the lake was within a "fen" would also mean that the mere would have to be an arm of the sea.  A fen is an Old English term for a marshy, frequently flooded area of land.  Unlike a swamp, a fen does not have woody trees. It is full of grasses and reeds that are fairly low to the ground. Fens tend to be foggy and dark, matching the description of it as being forbidding.  

the answer would be c