The 19-year-old left-back, who has been a stand-out performer for Alavés during his loan spell with the Copa del Rey finalists, is available for just €24million this summer due to a clause in his contract.
Such a bargain price for one of Europe's brightest young stars attracted a host of suitors, with Liverpool and Barcelona among those taking an interest.
But it is Real Madrid who look to have won the race, triggering his clause and agreeing a contract with the Marseille-born defender.
Hernandez is expected to sign for the next five years at the Bernabeu and has been earmarked as the long-term successor to Marcelo at the position, but the timing of this move will no doubt come under scrutiny with the second leg of the Champions League semi-final between Atleti and Real taking place this week.
Club president Florentino Perez has, for a number of years now, had a pact in place with cross-town rivals Atletico that they would not try to sign players from each other. The understanding is that, because of Theo's clause, Madrid have not broken this gentleman's agreement but should Antoine Griezmann's camp further push for a move to the north of the city then there remains a chance that Perez could blow things wide open with a bid.
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