Create is as a subdomain, like sub.example.com (I usually call it beta.example.com)
Once it's all up and running, you have two choices:
1) Change example.com so it's no longer Fully Hosted, but is a Mirror of sub.example.com
2) Use an FTP program and connect to your server and rename your directories: example.com becomes old.example.com ; sub.example.com becomes example.com (this is my preferred method)
Either way, when you're done, edit your WordPress general settings to reflect the new domain name instead of subdomain name.