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From O'Reilly's book "TCP/IP Network Administration":

option ip-forwarding 0 | 1; 

Specifies if the client should do IP forwarding. 0 disables IP forwarding, and 1 enables it.

The only IP forwarding system I'm aware of is the one defined in /proc/sys/net/ipv4/ip_forward. From my point of view, this behavious requires some server capabilities.

I don't understand why a DHCP server should decide such things for a client. So I'm wondering if it's the same IP forwarding we're talking about here.

Is it the same "IP forwarding" system we're talking about here?

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I believe that's exactly what it would affect (assuming your DHCP client machine was running Linux, and your DHCP client supported that option[1]).

Remember, DHCP stands for Dynamic Host Configuration Protocol. While it is most commonly used for just supplying the most basic network information (IP Address, default route, DNS servers), it was designed to be flexible and capable of supporting a great deal more. There are literally dozens of standard options that can be specified by a DHCP server, along with dozens more that are non-standard extensions added by vendors (Microsoft, Apple, etc). There is even support for defining your own custom "local" options, too.

As for why the DHCP server would be deciding that for the client, it's to offload most, if not all, of the network configuration to the DHCP server. Yes, that's a rather unusual option to specify from DHCP, and one that is not likely used very often, but if you needed it, you'd want it available.

[1] Note: Not all all DHCP options are supported by all DHCP clients/hosts.

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