In most cases this is simply your own Subconscious Mind processing things. The dream scenarios, emotions, thoughts, pictures, dialogues etc, are symbolic representations of this conceptual processing. Conceptual is how the Subconscious Mind processes things. But since you have a physical brain and making a physical adventure, a lot of these processing concepts are being translates into these picture and dialogues which you then can perceive during the dream.
Yes, plus all the other options too.
“Reality” is much more vast and crazy than our human minds can imagine. That’s why we try to make sense of it by thinking in concepts like “dimensions”, “parallel timelines”, “parallel selves”, “parallel incarnations” etc. of which I believe that all of these exist. You might be interested in this thread here too: