Tunnel mode encapsulates the entire original IP packet with a new header, encrypting everything. This is the standard mode for site-to-site IPsec VPNs.
Why this answer
Tunnel mode is the correct choice because it encrypts the entire original IP packet, including the original header, and then encapsulates it within a new IP header. This is required for site-to-site VPNs where the original source and destination IP addresses must be hidden or protected, and the new header is used for routing between the two VPN gateways.
Exam trap
Cisco often tests the distinction between Transport and Tunnel modes by asking which mode encrypts the entire packet, and candidates mistakenly choose Transport mode because they confuse 'encrypting the payload' with 'encrypting the entire packet', or they think AH provides encryption.
How to eliminate wrong answers
Option A is wrong because Transport mode only encrypts the payload of the IP packet, leaving the original IP header intact and unencrypted, which does not meet the requirement to encrypt the entire packet including the header. Option C is wrong because AH (Authentication Header) provides integrity and authentication but does not encrypt the packet; it only adds an AH header after the IP header, leaving the payload and original header in plaintext. Option D is wrong because ESP (Encapsulating Security Payload) alone can be used in either Transport or Tunnel mode; specifying 'ESP only' does not indicate the mode, and in Transport mode it would not encrypt the original header, so it is not a complete answer to the question.