D.H.
How about letting your daughter decide what to call her? In our family, the kids (usually the oldest in the generation) botches the name as best they can and it sticks. My mom couldn't pronounce Nelda so my greatgrandmother became Nene. My grandmother was named Ole. I couldn't say Grandma Ole, it came out Grole. By the time I can remember, everyone in town called her Grole (okay, it doesn't have to spread that far). My grandfather always greeted everyone with the salutation "Ahoy!". My son thought his name was Ahoy and pretty soon everyone in the family was calling him Ahoy. Your daughter doesn't care what this woman will be called, language aquisition is simply exciting. If you don't call the woman Grandmother, the child will not call her Grandmother.