Here you set the virtual folder path and the physical path it maps to. If the Virtual Folder Path is nested under another path, that path must exist. ie: /sub/virtual as a virtual folder path would require the existence of the /sub path. You can also set the permissions you wish to use for this virtual folder path.
A virtual folder path of just / will override the home directory. This can be done as a way of providing a home directory that is outside the server root. Usually this would be done per user on the Virtual Folders tab in the Add/Edit User control