Hi, good points.
So the cursor should be free to go anywhere, but once the object is grabbed it can be only dragged within a specified area (which preferably constitutes a sprite). When it reaches the border it just stops, i.e. stays grabbed but can't be moved any further.
Here's a mockup:
So in this example, say I want the bomb to be draggable over the red area, so that I can enable physics when it is dropped and have it fall on the island. Since the bomb explodes on-collision with the island I don't want the player to be dragging it around the menu, island etc. but only in the specified area. I hope it's clearer now.