I
believe that number 1 is correct given my understanding of replacement effects. Relevant Rules Text:
616. Interaction of Replacement and/or Prevention Effects
616.1. If two or more replacement and/or prevention effects are attempting to modify the way an event affects an object or player, the affected object's controller (or its owner if it has no controller) or the affected player chooses one to apply, following the steps listed below. If two or more players have to make these choices at the same time, choices are made in APNAP order (see rule 101.4).
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616.1e Once the chosen effect has been applied, this process is repeated (taking into account only replacement or prevention effects that would now be applicable) until there are no more left to apply.
I
know that number 2 is correct as this has come up for me before in tournament and MTGO play.