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Hernandez, 23, who was part of France 's World Cup winning team last year, will join Bayern on 1 July.
The $ 90 million fee is a record for Bayern, almost doubling the amount paid for Corentin Tolisso, who is also French.
"I am very happy that Lucas Hernandez, World Cup winner, has signed one of the best defenders in the world," Bayern sports director Hasan Salihamidzic told the club's website.
"Lucas can play both center and back left, and he will continue our great tradition of French football and improve our team."
Hernandez will be the 10th French player over the years to join Bayern, who signed another winner of the World Cup France – Benjamin Pavard – during the transfer in January. Pavard will join Bayern from VfB Stuttgart at the end of the 2018/19 season.
Bayern are leading the Bundesliga table against Borussia Dortmund, but left the Champions League this season in the round of 16 after losing 3-1 to Liverpool. It was the first time that Bayern has not reached the last eight places since 2011.
Knee injury
During Hernandez's medical visit, it was revealed that he was suffering from a knee injury requiring surgery.
"During the medical examination, we found that the inner collateral ligament of the player's right knee required surgical repair," said Dr. Hans-Wilhelm Müller-Wohlfahrt, Chief Medical Officer of FC Bayern.
"Based on his experience, Lucas Hernandez will be available for FC Bayern at the start of the 2019/20 Bundesliga season."
Hernandez, born in Marseille in 1996, has been working for Atletico for 12 years and played 110 games with the first team.
"It's a very important day in my football career," said Hernandez. "FC Bayern Munich is one of the best clubs in Europe and the world and I am proud to be able to fight for all possible titles with Bayern.
"I'd like to thank Atletico, the management, the coaches, my team-mates and the supporters for 12 wonderful years.Atletico will always remain a part of me.Now, I can not wait to move on to the next step with FC Bayern. "
Hernandez was part of the Atletico team that reached the Champions League final in 2016 and won the Europa League in 2018.
In July 2018, he won the 2018 World Cup with France after the team of Didier Deschamps beat Croatia 4-2 in the final.
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