Answer:

Introduction:
Hydra is a simple freshwater organism belonging to the phylum Cnidaria. It possesses a specialized reproductive system that allows it to reproduce sexually. The process of sperm production in Hydra involves various types of cells, including interstitial cells.

Sperm production in Hydra:
Hydra reproduces both asexually and sexually. In sexual reproduction, the male Hydra produces sperms that are used for fertilization. The process of sperm production in Hydra involves the following steps:

1. Interstitial cells:
- Interstitial cells are multipotent stem cells found in the gastrodermis layer of Hydra.
- These cells have the potential to differentiate into various types of cells, including sperm cells.
- Interstitial cells are responsible for the production of sperms in Hydra.

2. Differentiation into sperm cells:
- Under appropriate conditions, interstitial cells undergo differentiation to form sperm cells.
- The process of differentiation involves the activation of specific genes and the production of proteins required for sperm development.

3. Sperm formation:
- Once interstitial cells differentiate into sperm cells, they undergo further maturation to form functional sperms.
- This process involves the development of flagella, which enables the sperm to swim and reach the eggs for fertilization.

4. Fertilization:
- After sperm formation, the sperms are released into the surrounding water.
- The sperms then need to reach the eggs of the female Hydra for fertilization.
- The fertilization process involves the fusion of the sperm and egg nuclei, resulting in the formation of a zygote.

Conclusion:
In conclusion, the correct answer is option 'B' - Interstitial cells. These multipotent stem cells found in the gastrodermis layer of Hydra are responsible for the production of sperms. Through the process of differentiation and maturation, interstitial cells give rise to functional sperm cells that are necessary for sexual reproduction in Hydra.