the whole video frame is not shown completely on the screen
Well, that depends on the original ratio of the source footage. When you encode a video for display on the iPhone you can choose whether to crop it, zoom it, change the ratio to fit etc.
This "selection window" should move anywhere on the full video frame, automatically or manually, with time.
You mean something like the "Pan and Scan" process that widescreen movies go through when reformatted for different ratio screens?
http://en.wikipedia.org/wiki/Panandscan
Personally, I think this is best left to the movie producers, like they do for DVD releases, as it would be a bit annoying having to move the screen around manually all throughout a movie.
Send your suggestion to Apple here though:
http://www.apple.com/feedback/iphone.html