Translation:She is wearing a scarf instead of a hat.
i sted means instead - which can be broken down to in stead, which in old English did mean in place of. However, the larger mistake is the use of the word the in front of the. It just wouldn't be used in English. She is wearing a scarf in place of a hat is marginally acceptable, probably shouldn't be added as an acceptable option, though, because it's pretty rare.