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I have used the second approach with ETRAN and PSCAD.
I had to go 6 buses away from the relevant bus, at which point there was no significant difference compared to the frequency sweep results (Impedance vs Frequency) using the 5 buses away option. Therefore, explicit representation of the network up to 5 buses away from the relevant bus gives sufficient accuracy. In your own study, the answer may be 3, 4, 5 or >5, but the approach should be the same.
You can also consider using the frequency dependent equivalent network element in PSCAD. With this element, you enter the results of the frequency sweep at the relevant bus, do some vector fitting, and then you have an equivalent representation of the external network that is valid for a large range of frequencies.
