Hernandez, the younger brother of Atletico centre-back Lucas, has shone on loan at newly-promoted Alavés this season, helping them into the Copa del Rey final and a mid-table finish.
The Marseille-born full-back is expected to return to Atleti in the summer and fight for a first-team spot.
But his performances have attracted attention from some of Europe's biggest clubs, enticed by his potential and a bargain price tag.
While Hernandez is tied down to Atletico until 2021, his release clause of just €24million (currently £20.5m) is an eminently reasonable fee for one of Europe's most promising players at his position. At just 19 he is a La Liga regular and Liverpool, looking to upgrade on Alberto Moreno, and Real Madrid, looking to find a successor to Marcelo, are two of the keenest suitors among the raft of top clubs who have been watching Theo in recent months.
Liverpool, who have played midfielder James Milner out of position at left-back for much of the campaign, are expected to invest in the position this summer despite being happy with the England man's performances.
Real Madrid coach Zinedine Zidane praised Hernandez in his press conference on Tuesday, but said he could not talk about the contractual situation of players outside the club.
The Bernabeu club have a non-aggression pact with Atletico over signing their players, but should they trigger Hernandez's clause then there is some talk that it could open the door for a move to bring Antoine Griezmann across the Spanish capital, though it would seriously damage relations between the two institutions.Reuse content