The Netherlands Under-21 international has joined the Hornets on loan for the rest of the season after committing his future at Stamford Bridge until 2020.
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A Chelsea statement read: "Nathan Ake has today signed a new five-year contract with Chelsea.
"The 20-year-old will continue his development by spending this season on loan in the Premier League at Watford."
Ake featured five times for the Blues in four competitions last season, while also making five appearances for Championship outfit Reading during a month-long spell.