You should embroider it. This can be done with cross-stitch or other types, but if you want it to look like it was knitted in, use duplicate stitch (aka Swiss darning). Lots of good tutorials if you Google for them.
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I agree with the others, do dupicate stitch. It really isn't hard once you see the tutorials. For the hat I made for my son, I got the pattern for the letters here. They have a nice selection to choose from.
You'll see the Poncho I made for our neice. I put her Initails on it.
I just single crocheted a chain. BO and olay around with it till you make his /her first inital with it. Then just sew a ew stitches in the letter to make it hold the shape of the letter. And do the same with second initail. In Lauren's case, I made 2 single crochet chains and made a L a& an S. Then sewed them onto her poncho.